Financial News and Advice in Singapore

Money Mysteries: What’s the Big Deal About the Paradise Papers Leak?

The Paradise Papers leak gave us a peek into how the rich hide their money. Whether they should, is another matter altogether.

The news has been abuzz about the Paradise Papers, the second biggest leak of private banking information since the Panama Papers in 2015. But what’s the big deal about this data, and what does it mean to the average Singaporean? Here’s a quick summary of why it’s important.

What are the Paradise Papers?

The Paradise Papers are a leak of confidential banking data. It consists of 1.4 Terabytes of information, detailing the hidden bank accounts of thousands of wealthy individuals.

Back in 2015, the Panama Papers leak also did the same thing – however, the Panama Papers didn’t consist of as many high profile individuals as the Paradise Papers.

Some of the exposed banking information concerns individuals such as:

Queen Elizabeth II of England

United States Secretary of Commerce, Wilbur Ross

Prime Minister of Canada, Justin Trudeau

In addition, some major companies, such as Apple and Nike, have also had their banking information exposed.

So What’s the Big Deal about Exposing Their Bank Information?

The Paradise Papers reveals that many wealthy individuals and companies make use of offshore tax havens, such as the Cayman Islands and Bahamas. This is relevant because, in the eyes of some people, this is indirectly stealing from the country.

Here’s an analogy:

Say that, instead of receiving your monthly paycheque and banking it in Singapore, you ask that your money be sent to Company X.

Now previously, with the help of a law firm and a private bank, you registered company X in the Cayman Islands. No one can see who the owner of this company actually is – only the law firm and the bank know you’re the real owner.

Because the money is then deposited with Company X, our local authorities, such as the Inland Revenue Authority of Singapore (IRAS), may fail to notice your income. This, then, allows you to avoid paying taxes.

Realistically, it doesn’t make much sense to do this in Singapore – we have one of the lowest tax rates in the world. However, in countries such as the United States, where taxes can be up to 40 per cent of your income, there’s a strong incentive to hide the money from the government.

This is especially true among wealthy individuals. If you have an annual income of S$20 million, for example, and your country has an income tax of 40 per cent, your government could be taking S$8 million a year from you.

While there are still taxes in places like the Cayman Islands, they will be much lower compared to places like the UK or United States. That’s why these countries are called tax havens – the combination of low taxes and high confidentiality encourages the wealthy to hide their money there (and these countries benefit from the inflow of wealth).

Is Dodging Taxes Illegal, or Merely Immoral?

Dodging taxes this way may not be illegal (depending on your country’s laws). It’s referred to as tax avoidance. This is different from tax evasion (tax evasion is when you outright lie about your income, to your government).

Of course, to many people, these are all just word games. Dodging taxes this way is frowned upon, because it indirectly steals from the country. Afterall, tax dollars are used to fund the government, and its various bodies.

For example, when you receive subsidised hospital treatment, free Primary school education, grants for your HDB flat, and so forth, all of that money comes from companies and individuals who pay taxes.

When rich people and companies collectively hide their money from the government, the state loses funding for such programmes. Nonetheless, those same rich people and companies still benefit from the same government programmes – a multi-millionaire still benefits from the protection of the police and the Singapore Civil Defence Force (SCDF) for example, even if he hides his money and doesn’t contribute to it.

Furthermore, it’s usually the very rich and not the poor who can hide money this way – the average Singaporean can’t afford the process of opening foreign companies and bank accounts, and paying a law firm or private bank to keep it secret.

As such, this kind of tax avoidance indirectly shifts the burden of funding the government to the poorer members of society, who can less afford it. The rich get to hide their money and shoulder less of the burden.

And that’s why, even though tax avoidance may not be technically illegal, it’s still considered criminal in the eyes of many.

Powerful Individuals Dodging Taxes May be Vilified

Canadian Prime Minister Justin Trudeau, when campaigning to get elected, promised to put an end to this sort of offshore tax avoidance. This leak, however, shows he’s involved in it himself.

Queen Elizabeth II is a reigning monarch supported – at least in part – by the tax dollars of UK citizens. This has led many to question if the Royal Family, or in fact the leaders of any country, should be allowed to stash their money in secret.

As for US Secretary of Commerce Wilbur Ross, his financial information shows he has close business dealings with the inner circle of Russian leader Vladimir Putin. This raises questions as to whether he’s abusing his authority to benefit himself and his Russian associates, at the expense of his country.

But Large Corporations May be More Easily Forgiven

Some people may feel that, by stashing money offshore, companies like Apple and Nike are also indirectly stealing from the country. After all, corporate taxes go to the government as well.

However, corporations will argue that they have a duty to their shareholders. For example, if you have Apple and Nike stocks, and you’re relying on these for your retirement fund, how would you feel if the companies didn’t minimise their own taxes? They would be costing you money, as a shareholder, by reducing their profit margins and lowering their share value.

Chances are, you would drop such companies from your portfolio, for their financial mismanagement. If you don’t, then your fund manager (the person running your endowment plan, unit trust, ILP, etc.) probably will.

Companies are supposed to minimise costs as much as possible, to benefit their shareholders. But at the same time, doing so could mean minimising taxes. This is a difficult conundrum, one that probably won’t be resolved any time soon.

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By Ryan OngRyan has been writing about finance for the last 10 years. He also has his fingers in a lot of other pies, having written for publications such as Men’s Health, Her World, Esquire, and Yahoo! Finance.

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